Last week, local media reported that the China Securities Regulatory Commission intended to halt approvals for funds that plan to allocate more than 80% of assets to Hong Kong equities. Beijing and Shanghai-based asset managers, cited in the reports, were speculating that the regulator had concerns over a surging Hong Kong stock market.
In a statement (in Chinese), the regulator’s spokeswoman Gao Li did not mention that the halt was due to the recent rally in Hong Kong equity markets.
Instead, she explained that the regulator encountered some bait-and-switch cases in the batch of new funds. “The regulator runs close inspections on a daily and regular basis and before approving a product. We have discovered that some mutual funds named as a ‘Hong Kong equity fund’ are not investing in the Hong Kong stock market per se,” the statement reads.
In order to “protect investors’ legal rights and clear their doubts”, the regulator issued an instruction for asset managers in China that are launching “Hong Kong equity funds” that buy stocks through the Stock Connect.
The instruction was made for three types of Hong Kong equity funds:
- Funds can be labeled a “Hong Kong equity” fund or with similar wording only if 80% or more of non-cash assets are invested in the Hong Kong stock market. Asset managers of this type of fund should hire a minimum of two people with at least two years of experience in managing investments and one of them needs to be the portfolio manager.
- Funds investing less than 80% of non-cash assets in Hong Kong equities cannot be labeled a “Hong Kong equity fund”. The maximum holdings of Hong Kong stocks in this type of fund is 50% of total equity assets. Asset managers of this type should employ at least one person who has two years of experience in managing investments but is not necessarily the portfolio manager.
- An index fund is allowed to carry the name of the benchmark it follows.
The rule affects the mainland joint ventures that are awaiting fund approval and have application forms on the CSRC’s website as of November 10.
There are 425 products labeled “Hong Kong equity” that have pending applications and five of them are managed by Sino-foreign joint ventures. They are HSBC Jintrust, Hang Seng Qianhai Fund Management, China International Fund Management, First State Cinda Fund Management, and Invesco Great Wall Fund Management, in chronological order of their application submission.
